Question

New Fashions Inc. manufactures shirts for retail chains. Andy Jorgenson, the controller, is becoming increasingly disenchanted with New Fashions’s standard costing system. The budgeted and actual amounts for direct materials and direct manufacturing labour for June 2018 are as follows:   

Standard costs are based on a study of the operations conducted by an independent consultant six months earlier. Jorgenson observes that, since that study, he has rarely seen an unfavourable variance of any magnitude. He notes that even at their current output levels, the workers seem to have a lot of time for sitting around and gossiping. Jorgenson is concerned that the production manager, Charlie Fenton, is aware of this but does not want to tighten up the standards because the lax standards make his performance look good.

Required

1. Compute the rate and efficiency variances of New Fashions for direct materials and direct manufacturing labour in June 2018.

2. Describe the types of actions the employees at New Fashions may have taken to reduce the accuracy of the standards set by the independent consultant. Why would employees take those actions? Is this behaviour ethical?

3. If Jorgenson does nothing about the standard costs, will his behaviour violate any ethical conduct guidelines?

4. What actions should Jorgenson take?

5. Jorgenson can obtain benchmarking information about the estimated costs of New

Fashions’s major competitors from Benchmarking Clearing House (BCH). Discuss the pros and cons of using the BCH information to compute the variances in requirement 1.

Budgeted Amounts Actual Amounts Shirts manufactured 6,000 6,732 Direct material costs $30,000 $30,294 Direct material units (rolls of cloth) 600 612 Direct manufacturing labour costs $27,000 $27,693 Direct manufacturing labour-hours (DMLH) 1,500 1,530 There were no beginning or ending inventories of materials.

that is full question. table is given above

Answer 1

1. ) COMPUTATION OF VARIOUS VARIENCES

MATERIAL USAGE VARIANCE = STANDERD PRICE (STD.QTY-ACTUAL QTY. )   

$50 (600-612)= - $600

MATERIAL PRICE VARIANCE = ACTUAL QTY (STD PRICE- ACTUAL PRICE)

612 ($50-49.5)=$306

MATERIAL COST VARIANCE =( STD. QTY*STD PRICE) - (ACTUAL QTY.*ACTUAL PRICE)

600*50 -612*49.5 =30000-30294= - $294

= -$600+$306 = -$294

LABOUR COST VARIANCE =( STD TIME*STD RATE ) - (ACTUAL TIME *ACTUAL RATE)

(1500*27000/1500) - (1530-27693/1530

-$693

LABOR EFFICIENCY VARIENCE = (STD RATE (STD TIME-ACTUAL TIME)

18(1500-1530)=-540 HRS

LABOR RATE VARIENCE ACTUAL TIME (STD RATE -ACTUAL RATE)

1530 HRS (18-18.1)=-153

TOTAL = -540 +(-153)=- 693

2.) THE TYPE OF ACTION TAKEN BY EMPLOYEES AT NEW FASHION

THEY MIGHT INVOLVED IN GOSSIPING WITH OTHER EMPLOYEES

THEY MIGHT DO WORK SLOWLY

THEY ARE RELUCTANT TO WORK IF THEY HAVE NOT HAVE GOOD RELATION WITH JORGENSON

THEY MIGHT PRODUCE LOWER QUALITY PRODUCT

PRODUCT MAY HAVE FLAWS

THEY MAY PUT VARIOUS TYPES OF COMPLAINTS

NO THIS BEHAVIOUR IS NOT ETHICAL

3. IF JORGENSON DOES NOTHING ABOUT STANDARDS THIS WOULD NOT VIOLATE ANY ETHICAL CODE OF CONDUCT GUIDE LINES

4. JORGENSON WOULD CONDUCT MEETING WITH EMPLOYEES AND HEAR WHAT PROBLEMS THEY HAVE WITH COMPANY. THIS WOULD HELP HIM TO SRT OUT PROBLEMS

5. IF JORGENSON OBTAINED INFORMATION FOR STANDARD FROM (BCH) THIS COULD HAVE POSITIVE ASPECT AS IT GIVES NEW STANDARDS AND HAVE COMPARISON WITH ESTABLISHED STANDARDS AND MAKE HELP IN SETTING NEW STANDARDS AND COMPUTE VARIANCES

IF LABOR RATE IS LOW IN COMPARION THEN HTIS WOULD FAVOUR LABOR AND IF WORKING HOUR ARE MORE IN COMPARIOSON THEN THIS WOULD GOES WITH LABOUR

BUT IF EMPLOYEES ARE RELUCTANT THEN THIS COULD BE PROBLAMATIC FOR THE COMPANY